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I Was an Evil Investment Banker

Wall Street bonuses have run afoul of the government. Should Uncle Sam step in and regulate?

It's true. I was a real, live investment banker. And while that used to be a source of pride for many financial professionals, the media today has made investment bankers seem more like something that crawled up from the pits of Hades.

There are some very valid reasons for citizens' outrage against the banking sector. Though financial institutions have been banging down the government's door to give them handouts, they still managed to find loose change in their collective purses to pay out $18 billion in bonuses for 2008. The specific case of Merrill Lynch and its rushed bonus payouts under John Thain has garnered extra attention, as that firm crumbles under the new ownership of Bank of America(NYSE:BAC).

But before you grab the pitchforks ...The term "investment banker" -- or just "banker" -- itself is a pretty broad brush. It tends to cover everyone who works at an investment bank, from Goldman Sachs(NYSE:GS) to the investment banking arms of Citigroup(NYSE:C) or Bank of America. However, these firms contain a host of different roles. Various employees make large trades for institutional clients, structure collateralized debt, advise on mergers, trade on the firm's account, maintain and improve the firm's technology infrastructure, run private equity funds, and many more such jobs.

In an industry that can see unbelievable revenue production from small numbers of employees, would it really be in the banks' best interest to tick off their best people by cutting out the potential for big bonus payouts? Let's consider a few realistic (though not necessarily real) examples:

Scenario AA group within JPMorgan's (NYSE:JPM) technology division completes a massive overhaul of the bank's data centers. This overhaul will not only improve the security of the data centers, but also reduce the power draw, increase speed, and reduce the manpower needed to maintain it on a day-to-day basis. The project will potentially save JPMorgan tens of millions of dollars in overhead. Does this team deserve bonuses?

Scenario BA sales-trader at Goldman Sachs has doubled her account list over the past year, landing huge trades from a handful of big-name clients. Her trading volume is up by leaps and bounds, generating a lot of trading fees for Goldman. This trader's clients trust her and her execution ability, and they would likely follow her to another bank. Would you give her a bonus?

Scenario CM&A teams at Morgan Stanley(NYSE:MS) and Bank of America land a massive deal during a tough time – hypothetically, a $68 billion deal for a client whose name rhymes with Pfizer(NYSE:PFE). The deal generates hundreds of millions of dollars in fees for the two banks, all thanks to a handful of core people from each company. Each bank's main banker landed the deal because of a good relationship with the folks at Pfizer and Wyeth. No bonuses here?

Personally, I can't speak to the specifics of the tech groups at the big banks or the traders, but having actually worked on M&A deals, I know that the bankers working on that Pfizer-Wyeth deal haven't done much sleeping for a while. Heck, their families may have started to forget what they look like. It's not a fun lifestyle (a major reason why I was an investment banker), but it does promise big bonuses – in exchange for a lot of 100-hour weeks and a little bit of luck.

The trick is how to payBonuses aren't anything new. They've been motivating salespeople in just about every industry for a long, long time. They're the epitome of rewarding employees based on merit, and I think it would be a big mistake for the government or anybody else to push Wall Street to guillotine the bonus as an incentive tool.

But in many cases, Wall Street has botched what it means to deserve a bonus. The examples above are all instances where the banks collect fees (or reduce expenses) with no further future exposure to loss. But as we have seen all too well, there are plenty of similar businesses within banks and investment banks that potentially expose the bank to huge losses down the road. It would be fairer to compensate employees based on the eventual outcome, rather than the transaction or the initial fee. That setup would also change the whole incentive structure, encouraging employees to do what's right for the long term, not just for today.

In a similar way, C-level executive pay has been little more than a "heads I win, tails I also win" proposition. Merrill Lynch's former boss Stan O'Neal was a perfect example of this, walking away from a firm that he helped drive into the ground with far more than $100 million. It's troubling to say that the heads of hedge funds are more responsible, and more beholden to their shareholders, than the CEOs of our major financial institutions, but at least hedge fund bosses face compensation clawbacks if their performance tanks.

I'm not an investment banker ...... but maybe I'm still drinking the investment banking Kool-Aid. Maybe the services that bankers provide really aren't worth the hundreds of millions that they get paid. But if, as a country, we still want to at least pay lip service to capitalism, I don't see how we can cry foul when employees who singlehandedly make millions for their companies take home a fat paycheck. There's a lot of work that needs to be done on Wall Street, but come on! Put the pitchforks down, back away from the tar and feathers, and let's do this the right way.

Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. Bank of America is a formerMotley Fool Income Investorpick. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...